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Have Facebook apps really created $15B in economic value?

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Has the “app economy” sparked by the Facebook platform led to the creation of almost a quarter of a million new jobs and over $15 billion in spinoff benefits for the real U.S. economy? That’s the claim made by a study released Monday by researchers at the University of Maryland: news that will no doubt make Facebook feel loved as it prepares for the f8 developer conference. But do those estimates stand up to scrutiny? The Facebook app report seems to do what many similar studies of economic stimulus attempts (such as the Olympics) routinely do: overstate the benefits and understate the factors that might make the numbers look smaller.

The study, which comes from researchers at the University of Maryland’s business school (a PDF version of the full report is here), uses a number of formulas to come up with the impact that Facebook apps have allegedly had on the economy. One takes the number of companies developing apps — of which there are 148, according to the report, including Zynga and Playfish (which was bought by Electronic Arts in 2009 for $300 million) (s erts) — and the average number of daily users for each Facebook app, and then uses those to estimate the total number of employees who work for third-party app developers.

Using those calculations, the report’s authors came up with a figure of 53,434 for the number of people directly employed by firms that develop Facebook apps. Then they used another formula to calculate the “multiplier effect” of those jobs: in other words, how many other jobs might have been created in related industries because of those jobs. Then they estimate the average compensation for all of those jobs in order to come up with the total economic impact of Facebook apps.

Billions of dollars in spinoff economic impact

After all these calculations, the authors say Facebook has created between 182,000 and 235,000 jobs with a total economic value of between $12 billion and $16 billion:

As a result of analyzing the aforementioned factors and data, a conservative estimate of the employment impact of developers building apps on the Facebook Platform in the United States in 2011 is 182,744 full time jobs [and] a conservative estimate of the total employment value of Facebook’s app economy is $12.19 billion. Using more aggressive estimates, the Facebook App Economy created 235,644 jobs, adding a value of $15.71 billion dollars to the U.S. economy.

There has been a lot of coverage of the report’s conclusions, since it appears to show that Facebook is a massive contributor to the U.S. economy and apparently a better creator of jobs than the entire Obama administration. Google (s goog) came out with a similar kind of report last year that estimated its economic impact at $54 billion — a result of adding up all the payments the web giant makes for AdWords and AdSense, as well as an estimate of how much value businesses get when someone clicks on their name in a search result.

Critics of Google’s report said that the numbers were pure spin from the web company, which was (and is) trying to defend itself against allegations of antitrust behavior. And there’s a very spin-like feel to the University of Maryland report as well, which used data supplied by Facebook. What better way to make the case that the social-networking giant is a positive force in the U.S. economy, and also to promote the company’s f8 developer conference, where it will try to win new converts to its platform?

The problem with such reports is that they pile so many estimates on top of other estimates that it’s difficult to determine when they have lost touch with reality — just as every economic-impact report concludes that winning the Olympics or some other sporting event will be a windfall for a country’s economy, and almost inevitably it turns out to be just the opposite, due to factors that weren’t considered originally.

Problems caused by overestimating the “multiplier effect”

One of the problems is the multiplier effect, which the report’s authors use to conclude that close to 250,000 total jobs have been created as a result of the Facebook app economy. There are a number of problems with assuming multiplier effects when it comes to fiscal policy, including the fact that investments often “crowd out” other investments, and these would apply to Facebook’s case as well. For example, it could easily be that all (or at least some of) the development effort expended on apps has simply transferred money and jobs from one area of the economy to another.

As experts in calculating multiplier effects have also pointed out, in some cases these effects can be very transitory and their impact on the economy can be short-lived (PDF link). According to one description of the process, “projects that add relatively little value to a raw product will have smaller multiplier effects.” That kind of criticism could also easily apply to something like a Facebook app, which in some cases individual developers have created in a matter of hours. How much value could such an app possibly create?

Is the 10th copycat version of FarmVille worth as much in jobs and value as the first? Unlikely. And Facebook has also been accused of being a drain on the actual U.S. economy, because of all the time that workers at non-Facebook related jobs spend updating their status or playing FarmVille; a British firm estimated the lost economic value at more than $73 billion a year. Surely some of those billions in theoretical value should at least balance out the aggressive estimates in this latest study.

That’s not to say Facebook hasn’t created value for the U.S. economy, because clearly it has: It’s generating billions of dollars in advertising revenue, and that has obvious benefits, and even if you focus just on the “app economy,” the rise of companies such as Zynga — which has a market value estimated at $20 billion — has obviously created some value. But theoretical stock-market valuations are different from “real” economic value, and so are the estimates of the theoretical jobs created as a result of people clicking a FarmVille link.

Post and thumbnail photos courtesy of Flickr users tarikgore1 and Tracy O

8 Responses to “Have Facebook apps really created $15B in economic value?”

  1. One way (albeit not worth billions of dollars) that the app-making companies create economic value is through these companies’ founders who often serve as angel investors in other new start-ups. Case-in-point: Mark Pincus, founder of Zynga, who was an early-stage investors in Grockit, the new and promising social network-based standardized test preparation platform.

  2. Matthew, this is a great analysis! Thanks for the post. I particularly liked your two questions mid-way in your analysis: 1) How much value could such an app possibly create? 2)Is the 10th copycat version of FarmVille worth as much in jobs and value as the first? Fun times! :)

  3. Content Monetization

    Good points. The authors of the study seem to have forgotten that many of the developers are based outside the US and are far from making $60k a year. Not to mention that, most of them are “serial app developers,” working on many similar apps at the same time. Adding apps as if each was a source of new jobs is at least problematic here.

  4. The report doesn’t take into account the fact that even big daddy, Zynga is developing games in China and other parts of the world. Many others are doing development overseas as well.

    It is extremely frustrating to see the press release getting amplified instead of picking this report apart and seeing what is fact and what is imagination.

  5. Wouldn’t it be right to say that stock market valuations might be transfer of value rather than creation of real value, e.g. from the workers who would have created value in their organization by working to the advertisers whose ads they clicked on and the virtual goods that they bought ?

    The point is that regardless of the value ‘created’ the valuations might be correct due to transferred value.